New Zealand does well in its insolvency law reform, partly assisted by not being a federation (no Linc Energy surprises), and also by not having an upper house of parliament (no Senate inquiries).
It also has the benefit, perhaps, of adopting our laws, but at the same time rejecting those aspects of them that are unsatisfactory. It also has a single insolvency regulator and government agency, even though it has separate corporate and personal insolvency laws – in its Companies Act 1993 and its Insolvency Act 2006.
On 15 May 2017, the NZ government released the Insolvency Working Group’s Report No. 2 which covers voidable transactions, Ponzi schemes, gift cards, director identity numbers and other corporate insolvency matters. The Report is well researched and considered and is at a level of analysis not seen in Australia for some years, no specialist law reform body having convened since the 1988 Harmer Report.
The Group seeks submissions on two main issues:
- voidable transactions, including aspects of the law arising from Allied Concrete, making direct comparison with Australian law; and
- Ponzi schemes, the control of which has revealed deficiencies in the remedies available under existing law, subject to a pending NZ Supreme Court decision in McIntosh v Fisk.
Voidable transactions
The Group takes the position that the criteria for setting aside voidable transactions need to strike a balance between the rights of creditors in an insolvency, and the need of business for certainty following its dealings with the insolvent company.
In that respect, the Report refers to the Allied Concrete Limited v Meltzer [2015] NZSC 7 decision that the defence available to creditors of “giving value” will always be satisfied on the facts by the nature of the transaction; (the Australian equivalent is s 588FG and the concept of “valuable consideration”).
The Group says it has mixed views about this outcome. It recommends that the ‘gave value’ defence be repealed, thus increasing the protection to creditors as a whole by reinstating the ‘altered position’ test (see our s 588FG(2)(c) “changed position in reliance”).
Other general recommendations are:
- to reduce the period of vulnerability for voidable transaction clawbacks from 2 years to 6 months where the debtor and creditor are not related parties, and
- 4 years if they are;
- reduce the limitation period from six to three years for voidable transactions, with a right of the court to extend time; and
- simplifying the continuing business relationship test by removing the subjective elements relating to the parties’ intentions.
The Report takes the admirable approach of trying to ensure that consistency is maintained between corporate and personal insolvency law, with changes recommended in corporate insolvency also recommended in personal, where relevant.
Timberworld Limited v Levin [2015] NZCA 111
This NZ Court of Appeal decision pulled apart, intellectually, the reasoning behind our “peak indebtedness rule” applied by Australian courts under s 588FA of the Corporations Act. It is discussed in the consultation paper.
Although NZ largely adopted Australia’s voidable transactions provisions, the Court of Appeal held that the peak indebtedness rule was not also adopted. In fact, in its review of Australian authorities, from the High Court down, the Court concluded that the
“Australian courts seem to have assumed the rule had the weight of authority and sufficient pedigree to warrant its direct application” but that the NZ Court had “located no Australian authorities offering a considered analysis of the rule”.
Right thinking New Zealanders
“It was in 1993 that the Australian abandoned the phrase ‘in the ordinary course of business’ as the key exception to their company voidable preference regime … New Zealand chose that moment to introduce into its own companies legislation the very phrase which Australia had just discarded. One of them must have got it wrong. Although in these situations right-thinking New Zealanders would normally assume it to be Australia, Barker J thought otherwise (Re Spraybooth). He may be right”: Fisher J, Re Modern Terrazzo [1998] NZLR 160.
Ponzi schemes
A Ponzi scheme is described as a fraudulent investment operation where the operator provides returns to investors from new capital paid to the operators by new investors, rather than from profit earned. Ponzi schemes are unsustainable and insolvency is inevitably the outcome, often with substantial investor losses arising.
Although there is a mix of legal remedies for those affected, the Group offers potential ways that insolvency and property law might better protect the interests of investors and speed up recovery processes. A problem with a liquidator’s recovery of moneys in a Ponzi scheme was litigated, resulting in the NZ Court of Appeal decision in McIntosh v Fisk [2016] NZCA 74. The decision raises the question of giving “value” as a defence to a voidable transaction and the law reform concept of a “Ponzi presumption” is under consideration. However, an appeal has been taken to the NZ Supreme Court and a decision is pending. Accordingly, no recommendations are made by the Group pending that decision.
Gift card holders
The Report recommends a new preferential claim for gift cards and vouchers, ranking equally with an existing preference for lay-by sales. The need for this change is said to have been highlighted by the collapse of Dick Smith Electronics shortly after Christmas 2015. The change would mean that gift card and voucher holders are less likely to be out-of-pocket because they would rank higher than ordinary unsecured creditors.
Lay-by sales are perhaps now a thing of the past but the NZ Layby Act 1971 accords the relevant priority along with Schedule 7 para 3 to the Companies Act 1993.
Australia’s inquiry into gift cards in the context of Dick Smith folded in 2016; and the UK has not acted on a 2016 report about gift cards in an insolvency.
As to whether we should again, or laterally, see Prepayment Consumer Creditors: A Special Case for Insolvency Proceedings? by Symes and Nosworthy, (2017) 25 Insolv LJ 29.
Safe harbour and ipso facto clauses
The Report notes the Australian safe harbour and ipso facto reforms but its assessment is that
“those reforms are not needed in New Zealand at present. However, it is important to keep them under review. A further assessment about their potential relevance to New Zealand should be made after the Australian Government makes the details of those changes public”.
New Zealand’s “insolvent trading” laws may offer the adequate balance that ours are said not to.
Director identity numbers
The Report also considers a director identity number for which there is said to be strong support subject to compliance costs and possible privacy issues.
It reports that India introduced a DIN in 2006 and in other countries – Hong Kong, Singapore, Sweden and Norway – directors use their national identity numbers. Australia and the UK do not have DINs, first explained and recommended by Professor Helen Anderson in Australia, and with now five government inquiries here recommending its implementation.
The NZ Report did not quite hear of the lukewarm response of the Australian government to the DIN proposal here, despite a DIN being central to any regulation of Phoenix misconduct, and important to safe harbour, among other things.
Submissions are sought by 23 June 2017.
NZ insolvency reform – gift cards, director identity numbers, voidable transactions, Ponzi schemes, and more
New Zealand does well in its insolvency law reform, partly assisted by not being a federation (no Linc Energy surprises), and also by not having an upper house of parliament (no Senate inquiries).
It also has the benefit, perhaps, of adopting our laws, but at the same time rejecting those aspects of them that are unsatisfactory. It also has a single insolvency regulator and government agency, even though it has separate corporate and personal insolvency laws – in its Companies Act 1993 and its Insolvency Act 2006.
On 15 May 2017, the NZ government released the Insolvency Working Group’s Report No. 2 which covers voidable transactions, Ponzi schemes, gift cards, director identity numbers and other corporate insolvency matters. The Report is well researched and considered and is at a level of analysis not seen in Australia for some years, no specialist law reform body having convened since the 1988 Harmer Report.
The Group seeks submissions on two main issues:
Voidable transactions
The Group takes the position that the criteria for setting aside voidable transactions need to strike a balance between the rights of creditors in an insolvency, and the need of business for certainty following its dealings with the insolvent company.
In that respect, the Report refers to the Allied Concrete Limited v Meltzer [2015] NZSC 7 decision that the defence available to creditors of “giving value” will always be satisfied on the facts by the nature of the transaction; (the Australian equivalent is s 588FG and the concept of “valuable consideration”).
The Group says it has mixed views about this outcome. It recommends that the ‘gave value’ defence be repealed, thus increasing the protection to creditors as a whole by reinstating the ‘altered position’ test (see our s 588FG(2)(c) “changed position in reliance”).
Other general recommendations are:
The Report takes the admirable approach of trying to ensure that consistency is maintained between corporate and personal insolvency law, with changes recommended in corporate insolvency also recommended in personal, where relevant.
Timberworld Limited v Levin [2015] NZCA 111
This NZ Court of Appeal decision pulled apart, intellectually, the reasoning behind our “peak indebtedness rule” applied by Australian courts under s 588FA of the Corporations Act. It is discussed in the consultation paper.
Although NZ largely adopted Australia’s voidable transactions provisions, the Court of Appeal held that the peak indebtedness rule was not also adopted. In fact, in its review of Australian authorities, from the High Court down, the Court concluded that the
“Australian courts seem to have assumed the rule had the weight of authority and sufficient pedigree to warrant its direct application” but that the NZ Court had “located no Australian authorities offering a considered analysis of the rule”.
Ponzi schemes
A Ponzi scheme is described as a fraudulent investment operation where the operator provides returns to investors from new capital paid to the operators by new investors, rather than from profit earned. Ponzi schemes are unsustainable and insolvency is inevitably the outcome, often with substantial investor losses arising.
Although there is a mix of legal remedies for those affected, the Group offers potential ways that insolvency and property law might better protect the interests of investors and speed up recovery processes. A problem with a liquidator’s recovery of moneys in a Ponzi scheme was litigated, resulting in the NZ Court of Appeal decision in McIntosh v Fisk [2016] NZCA 74. The decision raises the question of giving “value” as a defence to a voidable transaction and the law reform concept of a “Ponzi presumption” is under consideration. However, an appeal has been taken to the NZ Supreme Court and a decision is pending. Accordingly, no recommendations are made by the Group pending that decision.
Gift card holders
The Report recommends a new preferential claim for gift cards and vouchers, ranking equally with an existing preference for lay-by sales. The need for this change is said to have been highlighted by the collapse of Dick Smith Electronics shortly after Christmas 2015. The change would mean that gift card and voucher holders are less likely to be out-of-pocket because they would rank higher than ordinary unsecured creditors.
Lay-by sales are perhaps now a thing of the past but the NZ Layby Act 1971 accords the relevant priority along with Schedule 7 para 3 to the Companies Act 1993.
Australia’s inquiry into gift cards in the context of Dick Smith folded in 2016; and the UK has not acted on a 2016 report about gift cards in an insolvency.
As to whether we should again, or laterally, see Prepayment Consumer Creditors: A Special Case for Insolvency Proceedings? by Symes and Nosworthy, (2017) 25 Insolv LJ 29.
Safe harbour and ipso facto clauses
The Report notes the Australian safe harbour and ipso facto reforms but its assessment is that
“those reforms are not needed in New Zealand at present. However, it is important to keep them under review. A further assessment about their potential relevance to New Zealand should be made after the Australian Government makes the details of those changes public”.
New Zealand’s “insolvent trading” laws may offer the adequate balance that ours are said not to.
Director identity numbers
The Report also considers a director identity number for which there is said to be strong support subject to compliance costs and possible privacy issues.
It reports that India introduced a DIN in 2006 and in other countries – Hong Kong, Singapore, Sweden and Norway – directors use their national identity numbers. Australia and the UK do not have DINs, first explained and recommended by Professor Helen Anderson in Australia, and with now five government inquiries here recommending its implementation.
The NZ Report did not quite hear of the lukewarm response of the Australian government to the DIN proposal here, despite a DIN being central to any regulation of Phoenix misconduct, and important to safe harbour, among other things.
Submissions are sought by 23 June 2017.
Categories
Site Search